Lending Club (LC), the world's largest online marketplace connecting borrowers and investors, today submitted a response to the U.S. Treasury Department's Request for Information (RFI) on Expanding Access to Credit through Online Marketplace Lending.
"We appreciate the Treasury Department's continued interest in understanding how online marketplace lending can expand access to credit, and how the financial regulatory framework should evolve to support the industry's safe growth," said Lending Club founder and CEO Renaud Laplanche. "Our response reflects our company values and commitment to transparency, consumer friendliness, and responsible credit products, and takes advantage of this opportunity to offer input and ideas that can help the industry grow safely and responsibly."
Lending Club's response starts by explaining the benefits it delivers to both borrowers and investors. Lending Club uses technology to reduce costs and pass on the cost savings to borrowers in the form of lower interest rates and to investors in the form of better returns. More specifically, borrower benefits include:
- Significant cost savings: Over 70% of borrowers on our platform report using their loan to pay off an existing loan or credit card balance, and report that the interest rate on their Lending Club loan was an average of 7 percentage points lower than they were paying on their outstanding debt or credit cards.1
- Responsible credit: Customers who use the Lending Club platform to refinance their credit card balance are replacing revolving, non-amortizing, variable rate debt with a fully amortizing, fixed rate installment loan. This product provides for a more responsible way to manage their credit, and helps improve the customer's credit score by reducing the amount of open-ended credit. In fact 77% of these customers experienced a FICO score increase within three months of obtaining their loan through Lending Club, with an average score increase of 21 points.2
Investor benefits include:
- Access to credit asset classes that individual investors didn't have access to before and institutional investors only had limited access to on a pool basis.
- Steady cash flow and net annual returns averaging between 6%-9%3 since inception.
- Full control and transparency as to loan quality and performance. Individual investors decide which loans to invest in based on their investment objectives, and have access to a tremendous amount of historical performance data to ground their investment decisions.
At the invitation of the Treasury, Lending Club offered four recommendations for legislative or regulatory consideration that it believes would enhance or clarify the development and operation of online credit marketplaces to the benefit of consumers, small businesses, investors and the financial system more broadly:
- Small business lending protections - We believe existing regulations adequately protect consumers borrowing through online credit marketplaces. However, we are concerned that small business owners may not benefit from the right level of protections and transparency. We believe there is an opportunity for the industry to adopt best practices in terms of transparency and responsible credit, and for the appropriate regulatory agencies to continue to monitor the industry's progress in that respect. (Q11).
- Alignment of interest and disclosure requirements – Lending Club has a tremendous amount of "skin in the game" (starting with over 20% of our revenue from each loan being subject to loan performance over time) and an ongoing alignment of interests with investors. Therefore we believe that any mandated capital-based risk retention requirement for marketplaces would be misguided and detrimental to both borrowers and investors. To ensure investors have all the necessary information to make informed investment decisions and continue to exercise full control over the quality of loans being issued through marketplaces, we are proposing additional mandatory disclosure requirements. (Q10)
- Tax incentives to increase access to credit in underserved segments - We propose that investors who provide capital in defined underserved areas and to low- to moderate-income small business borrowers be taxed at the capital gains tax rate, rather than the current marginal income tax rate, if the loan is held for over 12 months. Additionally, we propose, similar to the UK framework, that all investors be able to offset losses directly against interest income and gains and have returns on the first $5,000 of investments made tax-free. (Q9)
- More efficient income verification – We urge that the IRS create an application programming interface (API) for its 4506t tax return transcript process. This would make it easier for consumers and small business owners to give lenders access to their tax information voluntarily. We believe this relatively simple improvement to the current 4506t process would make a meaningful difference in lenders' ability to offer lower cost, faster, easier, safer, and greater access to credit, across consumer and small business lending. (Q2 and Q9)